Development Research Partners specializes in economic research and analysis for local and state government and private sector businesses. Founded in 1994, Development Research Partners combines extensive experience in real estate economics and economic development to provide clients with reliable consulting services in four areas of expertise:  Economic and Demographic Research Research in support of business and community activities, ranging from community profiles to evaluating and forecasting economic and market conditions.

Industry Studies Specialized research projects including industry cluster research, industry trends analysis, and strategic competitive analysis.  Fiscal and Economic Impact Analysis Comprehensive custom analysis and analytical tools to evaluate and forecast site‐specific activities and model business and government costs and benefits.  Real Estate and Public Finance Economics Analysis and strategy for infill redevelopment, adaptive reuses, and property development including market and feasibility studies, public investment analysis, and public‐private partnering opportunities.

Metro Denver Economic Development Corporation | January 2018 | Page i Executive Summary U.S. Economy The United States continued on an expansionary path through 2017 with gross domestic product growing at a 2.3 percent pace, employment increasing by 1.5 percent, and the unemployment rate falling to 4.4 percent. The nation’s businesses generated more than 2.1 million jobs, consumer confidence exceeded pre‐recession peaks, there was continued wage growth, and strong business investment activity. While gross domestic product grew at a pace slower than the historic average since 1980 of 2.7 percent, growth in 2017 accelerated from the 1.5 percent pace posted in 2016 and was faster than the average since 2010 (2.1 percent).

The improvement in 2017 was partially due to stabilized oil and gas prices that had impacted employment in several energy‐producing states and affected oil and gas investment activity and corporate profits. Gross domestic product will grow at a 2.4 percent pace in 2018 as the country enters its ninth year of the current economic expansion. Gross domestic product will be boosted by the recent tax reform act that was passed in December 2017 that will influence disposable personal income and business investment activity. The unemployment rate is expected to fall to 4.3 percent while employment growth slows to 1.2 percent as a result of tight labor markets and persistently low labor force participation rates.

Inflation accelerated at the beginning of the year before falling back below the Federal Reserve’s medium‐term objective by the end of the year. Inflation is expected to post a stable, 2 percent rate in 2018. While the low unemployment rate and wage growth will contribute to inflationary pressure, the Federal Reserve is expected to continue to increase the target federal funds rate. The Federal Reserve announced three rate hikes in 2017, increasing the target rate to a 1.25 percent to 1.5 percent range. Additionally, the Federal Reserve announced in October 2017 that it began the process of shrinking its balance sheet that grew to historic levels during the Great Recession.

Oil prices are expected to average about $56 per barrel and prices of medical care and housing will continue to grow faster than average.

The greatest risks to U.S. economic growth include the possible renegotiation of NAFTA and trade agreements with China, Asia, and the European Union. International political tension is also a risk with escalating tension with North Korea and ongoing conflicts in the Middle East. Additionally, unexpected increases or decreases in energy prices remain a risk as well as the speed and pace that the Federal Reserve normalizes its balance sheet. As these risks influence business and consumer confidence, which in turn influence overall spending patterns, stability in these situations is needed for the U.S.

expansion to remain on track. Colorado Economy The pace of growth in Colorado will likely slow in 2018 as net migration tapers gradually and the unemployment rate remains near historic lows. Still, Colorado will likely be among the top 10 states for employment growth during 2017. Employment is anticipated to increase 2.2 percent in 2017 and 1.9 percent in 2018. In 2018, employment will reach 2.71 million workers, representing the addition of 50,500 jobs from 2017 to 2018. The unemployment rate fell to 2.6 percent in 2017 and will rise to an anticipated 2.7 percent in 2018. As companies consistently increased staffing levels, and Colorado’s labor force continued to tighten, the unemployment rate in 2017 reached its lowest monthly and annual levels in the history of the data series going back to 1976.

The previous monthly low was recorded in October 2000, which was 0.2 percentage points higher than the 2.2 percent rate posted in August 2017. Colorado is expected to benefit from in‐migrants, but as labor markets tighten across the country, net migration in Colorado is expected to slow.

Professional and business services, education and health services, and leisure and hospitality are anticipated to contribute the most to absolute employment growth in 2018. All eleven supersectors in Colorado are expected to add employment in 2018. The fastest growing regions in the state were along the Front Range. In 2017, the

Metro Denver Economic Development Corporation | January 2018 | Page ii Executive Summary Greeley MSA was once again one of the fastest growing metro regions in the state while Grand Junction has continued to struggle since the Great Recession.

Total personal income increased a robust 4.1 percent in 2017 due to increasing wages, rising housing and asset prices, and higher transfer payments. The pace of growth will increase to an estimated 5 percent in 2018. Low unemployment and rising personal income bode well for consumer confidence and spending activity in 2018. Retail trade sales increased by about 4.9 percent in 2017 and are expected to post a 4.7 percent increase in 2018. Overall, the Colorado economy is expected to have another strong year of growth in 2018. Metro Denver Economy Metro Denver recorded a strong year of growth in 2017 with rising employment levels and falling unemployment rates.

However, the pace of growth is slowing as population growth slows and tight labor markets limit employment growth. Net migration levels in Metro Denver remain strong, but have declined from peak 2015 levels. Job growth in 2017 pushed down the unemployment rate in Metro Denver to 2.5 percent, the lowest level recorded since 2000 (2.6 percent). The rate fell as low as 2.1 percent in August, but increased to 2.8 percent in November. The pace of Metro Denver job gains slowed during 2017, finishing out the year with 2.1 percent growth and the addition of 33,300 jobs.

All of Metro Denver’s 11 supersectors recorded employment growth between 2016 and 2017. Additionally, Metro Denver’s key industry clusters recorded robust and broad‐based growth over the past year. The three supersectors that added the most jobs in 2017 were professional and business services, leisure and hospitality, and natural resources and construction. The fastest growing supersectors were the transportation, warehousing, and utilities supersector, the other services supersector, and the natural resources and construction supersector. Growth in transportation, warehousing, and utilities was particularly strong as airlines at Denver International Airport recorded strong employment growth and several companies have opened large distribution and fulfillment centers in response to demand for e‐commerce.

Another notable growth sector was computer systems design and software engineering that represented one of the strongest areas of growth in professional and business services.

The residential real estate market continued at a strong pace in 2017. Metro Denver home sales increased 2.9 percent in 2017 from 2016 home sales, and posted a new record high. In addition, the median home price continued to rise through 2017 as low inventory and population growth drove up prices. According to the S&P CoreLogic Case‐Shiller Index, home prices in Metro Denver have increased year‐over‐year for 71 consecutive months. Meanwhile, commercial construction activity in the office and industrial markets may be approaching a peak. According to a measure of market cycles, Denver’s office market was still in an expansionary phase, while industrial moved further into hypersupply.

The retail market appears to be at an equilibrium level. In 2017, construction in the retail sector was close to its long‐run average.

Looking ahead, employment will increase 1.9 percent in 2018 with gains in all 11 supersectors. Once again, the transportation, warehousing, and utilities supersector will record the fastest pace of growth, followed by the natural resources and construction and the education and health services supersectors. The unemployment rate is expected to move up slightly to 2.6 percent in 2018 and remain near historic lows. Home sales activity is expected to fall in 2018 after six consecutive years of increases, declining by an estimated 1.5 percent. Overall, slower net migration activity, lower affordability, and higher interest rates should temper home price growth in 2018.

Home price growth is expected to slow to 5 percent, similar to a national rate. The pace of construction activity will remain strong in 2018 as several million square feet of office and industrial space will continue to bolster the market. Additionally, large scale infrastructure projects and other public/nonprofit investment activity will continue at a robust pace. The Metro Denver region’s eighth consecutive year of expansion will provide diverse employment opportunities and increasing housing options for its 3.2 million residents.

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 1 U.S. Economy The United States continued on an expansionary path through 2017 with gross domestic product growing at a 2.3 percent pace, employment increasing by 1.5 percent, and the unemployment rate falling to 4.4 percent. The nation’s businesses generated more than 2.1 million jobs, consumer confidence exceeded pre‐recession peaks, there was continued wage growth, and strong business investment activity. While gross domestic product grew at a pace slower than the historic average since 1980 of 2.7 percent, growth in 2017 accelerated from the 1.5 percent pace posted in 2016 and was faster than the average since 2010 (2.1 percent).

The improvement in 2017 was partially due to stabilized oil and gas prices that had impacted employment in several energy‐producing states and affected oil and gas investment activity and corporate profits. Gross domestic product will grow at a 2.4 percent pace in 2018 as the country enters its ninth year of the current economic expansion. Gross domestic product will be boosted by the recent tax reform act that was passed in December 2017 that will influence disposable personal income and business investment activity. The unemployment rate is expected to fall to 4.3 percent while employment growth slows to 1.2 percent as a result of tight labor markets and persistently low labor force participation rates.

Inflation accelerated at the beginning of the year before falling back below the Federal Reserve’s medium‐term objective by the end of the year. Inflation is expected to post a stable, 2 percent rate in 2018. While the low unemployment rate and wage growth will contribute to inflationary pressure, the Federal Reserve is expected to continue to increase the target federal funds rate. The Federal Reserve announced three rate hikes in 2017, increasing the target rate to a 1.25 percent to 1.5 percent range. Additionally, the Federal Reserve announced in October 2017 that it began the process of shrinking its balance sheet that grew to historic levels during the Great Recession.

Oil prices are expected to average about $56 per barrel and prices of medical care and housing will continue to grow faster than average.

The greatest risks to U.S. economic growth include the possible renegotiation of NAFTA and other trade agreements with China, Asia, and the European Union. International political tension is also a risk with escalating tension with North Korea and ongoing conflicts in the Middle East. Additionally, unexpected increases or decreases in energy prices remain a risk as well as the speed and pace that the Federal Reserve normalizes its balance sheet. As these risks influence business and consumer confidence, which in turn influence overall spending patterns, stability in these situations is needed for the U.S.

expansion to remain on track. International Economy According to the International Monetary Fund (IMF), global economic activity is strengthening and is expected to continue in 2018. The IMF expects the global growth rate to average 3.6 percent in 2017, higher than the 3.2 percent pace in 2016. In 2018, growth is expected to accelerate to 3.7 percent. The positive outlook is based in part on better than expected growth in the euro area, Japan, emerging Asia, emerging Europe, and Russia. Growth is expected for both advanced economies and emerging markets, characterized by strong investment, trade, and industrial production concurrent with stronger business and consumer confidence.

Economic growth in the advanced economies is expected to rise to 2.2 percent in 2017 and remain at 2.2 percent in 2018. Meanwhile, monetary policy in both Japan and the euro area continues to be accommodative. On a negative note, the IMF revised down the outlook for the United Kingdom where growth through the first half of 2017 slowed more than anticipated. Consumption growth and real household incomes are slowing in the United Kingdom and there is uncertainty about trade, migration, and financial activity associated with upcoming negotiations concerning Brexit.

The value of output in the emerging economies is expected to grow from 4.6 percent in 2017 to 4.9 percent in 2018. In China, growth will be supported by policy reforms and from expansionary fiscal policy and high levels of public investment. Emerging economies have been bolstered by a recovery in commodity prices and stable

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 2 U.S. Economy financial markets. Additionally, growth is expected to pick up slightly in Brazil and Latin America, and Russia emerged from a two‐year recession.

Gross Domestic Product Throughout this publication, (e) is used to represent data that are estimated in the absence of data for all 12 months of 2017; (f) indicates a forecast figure. Gross Domestic Product: +2.3 percent in 2017(e); +2.4 percent in 2018(f). Gross domestic product (GDP)—the total value of goods and services produced in the U.S. economy—is a key gauge of the nation’s economic health. Between 1980 and 2000, annual GDP growth averaged about 3.4 percent. From 2000 to 2016, annual growth has averaged a much lower 1.8 percent due to a number of factors including the Great Recession, demographic shifts, and slower productivity growth.

More currently, real GDP growth has averaged 2.1 percent between 2010 and 2016. National real GDP reported 15 consecutive quarters of growth between the second quarter of 2014 and the fourth quarter of 2017. Positive contributors to GDP growth over the past year included consumption of durable goods, nonresidential fixed investment, and exports. Notably, nonresidential fixed investment and exports reported growth in 2017, reversing contractions in 2016. Nonresidential fixed investment was boosted by investment in structures, and strong growth in intellectual property products, such as software and research and development.

With strong personal consumption and continued business spending, annual growth is forecast to be 2.3 percent in 2017 and accelerate to 2.4 percent in 2018.

Reasons for increased growth are easier to recognize when GDP is broken down into its four components: 1) household spending on goods and services; 2) business spending on software, equipment, and real estate; 3) government spending on goods and services; and 4) net exports, or foreign purchases of U.S. goods less our imports. Household Spending Household spending contributes nearly 70 percent of national output and has a long‐term average annual growth rate of about 2.7 percent. In 2017, consumer confidence was more than 16 percent higher on average than levels posted in 2007, and the unemployment rate dropped to its lowest level since 2000.

Consumer‐ spending growth in 2017 continued at a pace similar to 2016, with positive growth expected in 2018. Several factors will influence consumer spending in the year ahead.

Strong consumer confidence. Consumer confidence improved markedly in 2017, reaching well above levels posted in 2016 and exceeding pre‐recession peaks. Consumers’ assessment of their present situation continued to improve throughout 2017, including perceptions of business conditions and the availability of jobs. The exception was a dip due to hurricanes Harvey and Irma. Consumers’ expectations also improved in 2017 and the overall outlook is optimistic heading into 2018.

Economy Positive financial situation. According to the latest Economy and Personal Finance Survey from Gallup, Americans’ assessment of their current financial situation continued on an upward trend in 2017 and recorded its highest level since 2007. Fifty‐two percent of U.S. adults said their current financial situation was excellent or good. The rate had remained at or below 50 percent from 2008 to 2016. Tax reform increases disposable personal income. The Tax Cuts and Jobs Act (TCJA) recently passed by Congress is expected to boost the after‐tax income of most filers beginning in 2018, generating a positive effect on personal consumption expenditures.

The TCJA reduces the individual income tax rate in five of the lower tax brackets and reduces the top rate to 37 percent from 39.6 percent. In addition, the TCJA doubles the standard deduction. The higher standard deduction will lower taxable income for some filers depending on their level of personal exemptions. Another boost to filers is an expansion of the child tax credit, which according to the Tax Foundation, will increase from $1,000 to $2,000 while increasing the phase out from $110,000 to $400,000 for married couples. Analysis from the Tax Policy Center estimates that after‐tax incomes will increase in 2018 by as much as 4 percent for some filers.

At a macro level, the Tax Foundation estimates that the after‐tax incomes of all taxpayers will increase by 1.1 percent in the long run. Tax reform may also increase the labor supply. The Joint Committee on Taxation notes that tax policies change the incentives for potential workers to supply labor to the economy. A change in after‐tax wage income could incentivize workers to work more, or encourage workers to enter the labor force. For instance, the Tax Policy Center posits that the TCJA will mostly encourage lower‐earning spouses to enter the work force or work additional hours. The increase in the labor supply will boost household incomes and stimulate aggregate demand, thereby boosting GDP growth.

The Joint Committee on Taxation estimates the TCJA will increase consumption by 0.7 percent on average each year relative to baseline forecasts. Wage growth continues. After years of up and down growth in average hourly earnings on an inflation‐adjusted basis, earnings for private nonfarm employees increased at a strong rate through 2015 and 2016. Low unemployment rates continue to contribute to positive wage pressure with real earnings growth recorded throughout 2017. According to the Federal Reserve Bank of Kansas City, positive contributors to labor market conditions have included job flows from unemployment to employment, hiring rates, and the percentage of firms planning to increase employment.

Labor market conditions are expected to continue to support real wage growth for workers in 2018. The TCJA may also have a wage effect based on a reduction in the corporate income tax rate. Economic research indicates that labor bears part of the burden of the corporate income tax, although the amount is debated. Increased business investment may boost productivity and thereby increase wages. It should be noted that some of these effects will occur over the long‐term rather than in the short‐run. Home price increases adding to household wealth. According to the S&P CoreLogic Case‐Shiller home price indices, the national home index was up 6.2 percent between November 2016 and 2017.

According to the index, national home prices surpassed their pre‐recession peak set in 2006 by September 2016. The increase in housing prices provides a wealth effect to homeowners. Many homeowners utilized stronger home values and low

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 4 U.S. Economy interest rates for cash‐out refinancing and second mortgages. Data from Freddie Mac indicate the volume of cash‐out refinancing continued to grow in 2017, increasing more than 13 percent year‐to‐date through the second quarter of 2017 compared with the same quarters in 2016. Cash‐out refinancing peaked in 2006 at $320.5 billion compared with $61.2 billion in 2016. Meanwhile, owners’ equity in real estate as a percent of value continued to climb, approaching 60 percent or near levels typical of the 1990s and early 2000s.

The percentage had dipped as low as 36 percent during the Great Recession.

Equities contributing modestly to household wealth. The stock market is an economic indicator that is influenced by daily fluctuations in the economy. In 2017, stocks recorded their highest gains since 2013. Volatility in the market remained low throughout the year with the S&P 500 increasing 20 percent over‐the‐ year, the NASDAQ increasing 28.2 percent, and the Dow Jones Industrial Average up 25.7 percent. In 2017, more American’s were investing in the stock market, but levels were much lower than before the recession. About 54 percent of American adults were invested in the stock market in 2017, up from 52 percent in 2016, according to Gallup’s annual Economy and Personal Finance survey.

However, stock ownership since 2009 is much lower than pre‐recession levels. The average from 2009 to 2017 was 54 percent, down 8 percentage points from a 62 percent average from 2001 to 2008. Based on the survey, stock ownership rates for middle‐class adults and all age groups 64 years and below are significantly lower.

The TCJA is expected to boost the stock market in 2018. A key provision of the law is a reduction in the corporate income tax rate from 35 percent to 21 percent. The law also allows businesses to immediately deduct new investment over the next five years. These provisions are expected to boost business investment and profits that may increase the value of equities and amount of dividend payouts. While taxes have only a modest influence on company earnings and valuations, the effect is likely positive. Household borrowing activity strengthens, but the debt‐service ratio is stable. After the housing bubble burst in 2007, total household debt plunged compared with prior years.

The housing component of the recession heavily influenced the mortgage debt portion of household debt. Growth in household debt has been positive since the fourth quarter of 2011. Growth in mortgage debt turned positive in 2013 and continued to increase through 2017. Consumer credit also continued to expand through 2017. Despite more household borrowing activity, the ratio of household debt service to disposable personal income remained below 10 percent through 2017, well below the high of 13.2 percent in the fourth quarter of 2007.

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 5 U.S. Economy Business Spending During the Great Recession, corporate profits took a major hit as consumers purchased less goods and services, investors were cautious of further economic declines, and Wall Street reeled from the impact of the housing crisis. Since the low of 2008, corporate profits surpassed the pre‐recession peak in January 2010. Corporate profits slumped after the fourth quarter of 2014, dipping by about 17 percent by the fourth quarter of 2015. Falling energy prices affected profits of oil and gas companies that were among the nation’s most profitable for many years.

Additionally, profits were impacted by a weak global economy and strong dollar that influenced exports, which fell 2.5 percent in real terms from the fourth quarter of 2014 to the first quarter of 2016. As oil and gas prices stabilized, profit levels rebounded in 2016 and continued to grow in 2017, surpassing the fourth quarter 2014 level. Corporate profits were also bolstered by continued growth in exports. Profits are expected to remain on a generally positive trend through 2018.

Another factor that will influence business investment in 2018 is the passage of the TCJA. An analysis by the Tax Policy Center on the macroeconomic effects of the TCJA estimated that the law would improve businesses’ cash flow, boost near‐term investment activity, and stimulate aggregate demand and GDP. Another effect could include an influx of foreign capital. The Joint Committee on Taxation estimates that the amount of capital available for production will be 0.9 percent higher than baseline forecasts. Combined with individual income tax reforms, various tax analysts expect the new tax law to boost GDP by anywhere from 0.4 percent to 0.8 percent per year over the next few years.

The gains in GDP and investment are expected to fade over time as the individual rate reductions expire and the near‐term expensing provisions sunset after five years. Additionally, the larger deficits resulting from the legislation are expected to dampen investment in the long‐term and increase interest rates. In addition, the fact that TCJA was passed during an economic expansion may limit the stimulating effects of the law.

After a slowdown in real nonresidential private fixed investment in 2016, growth increased at an estimated 4.1 percent annualized rate year‐to‐date through the third quarter of 2017 compared with the first three quarters of 2016. Investment in 2017 was characterized by broad‐based increases in investment for structures, equipment, and intellectual property. Investment in structures declined throughout 2015 and 2016, due in large part to the oil and gas contraction. Investment in exploration, shafts, and wells, which includes oil and gas, rebounded with a nearly 50 percent increase year‐to‐date through the third quarter of 2017 compared with 2016.

Growth in commercial and healthcare structures was also strong. Investment in equipment rose in 2017 after falling in 2016, with companies investing in computers and peripheral equipment and industrial equipment. Intellectual property investments increased with strong growth in software and continued growth in R&D.

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 6 U.S. Economy Government Spending According to the Congressional Budget Office (CBO), the federal budget deficit for fiscal year 2017 is forecast to be $690 billion as of June 2017, 19 percent higher than 2016. The federal deficit as a percentage of GDP is projected to increase to 3.6 percent, marking the second year of increase after six consecutive years of declines since peaking at 9.8 percent in 2009. In 2018, the CBO estimates the deficit will decrease to $560 billion, and comprise only 2.8 percent of GDP.

Despite the decline in 2018, the deficit is expected to resume its growth trend in subsequent years.

According to the CBO’s economic forecast, which serves as the basis for its budget projections, the larger deficit in 2017 was partially due to weak tax collections that increased more slowly than outlays. Concurrently, outlays grew due to higher education and housing subsidies. Federal outlays in 2017 comprised a higher percentage of GDP than 2016, increasing from 20.7 percent to 21 percent. Outlays are projected to fall to 20.5 percent of GDP in 2018 before rising back to more than 21 percent of GDP in 2019. The decrease in 2018 is mainly due to accounting procedures rather than a change in trend.

Overall, the CBO expects that the economy will expand at a solid pace through 2018 with continued increase in the demand for workers, a tight labor market, and modestly rising inflation.

The size of the federal budget deficit will be impacted by the TCJA. The Joint Committee on Taxation estimates the TCJA will increase the budget deficit by about $1.1 trillion from 2018 to 2027. The Tax Policy Center estimates that the legislation will increase the federal budget deficit between $1.5 trillion and $1.8 trillion. The persistently larger budget deficits will increase the U.S. debt level. Tax Policy Center analysts estimate the law will raise the federal debt to GDP ratio by an estimated 5.5 to 6.3 percentage points. The increased deficit and federal debt may dampen economic growth over time through crowding out of investment activity and increased interest rates.

The International Monetary Fund’s (IMF) World Economic Outlook Database reports that the U.S. government gross debt in 2017 was estimated to be more than 108 percent of GDP, the fifth highest rate of the world’s advanced economies. The IMF estimates that gross debt will remain at about 108 percent of GDP in 2018. Major countries with the highest gross debt are Japan (240 percent), Greece (180 percent), Italy (133 percent), and Portugal (126 percent). In terms of net debt, or gross debt less the value of financial assets, the U.S. has the eighth highest rate at an estimated 82.5 percent of GDP in 2017.

Net debt is projected to contract slightly to 81.1 percent of GDP by 2018.

State and local government consumption expenditures and gross investment slowed in 2017, recording no growth for the year. While there was moderate growth in consumption expenditures, a category that comprises about 83 percent of total state and local government spending, gross investment contracted by about 4.5 percent. Looking ahead, the CBO expects state and local governments to contribute little to the growth of output through 2018. According to the 2015 Census of Government: Annual Surveys of State and Local Government Finances, the major sources of general revenue for state and local governments are taxes (46 percent), current charges (20

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 7 U.S. Economy percent), intergovernmental (19 percent), and insurance trust (9 percent). Major expenditures for state and local governments are education (28 percent), public welfare (18 percent), insurance trust (10 percent), and public safety (7 percent). Net Exports In 2017, net exports subtracted a slightly larger share from GDP than was recorded in 2016. Net exports peaked in 2005 at ‐5.5 percent of GDP. However, since 2010 net exports have comprised about ‐3 percent of GDP on average, falling to as low as ‐2.6 percent in 2013, and rising as high as ‐3.5 percent in 2016.

Trade volumes of both imports and exports fell in 2015 and 2016. However, the trade volume of imports and exports increased in 2017, with imports increasing at a faster pace than exports, leading to a growing trade deficit. Major U.S. exports include transportation equipment, computers and electronic products, chemical products, and machinery. The nation’s largest trading partners in terms of exports are Canada, Mexico, China, Japan, and the United Kingdom. Contracting U.S. export activity in 2015 and 2016 coincided with a strengthening dollar. The value of the dollar peaked in December 2016 and fell throughout the first three quarters of 2017, contributing to growing export activity.

The stronger global economy is anticipated to support growing export activity in 2018.

Interest Rates Prime rate: 4.1 percent in 2017; 4.9 percent in 2018(f). Since December 2015 the Federal Reserve has gradually increased the target federal funds rate, eventually maintaining a target range between 1.25 and 1.5 percent in late 2017. The December 2017 conference of the Federal Open Market Committee (FOMC) reported that while hurricane‐related disruptions affected economic activity, they did not change the outlook for the national economy. Economic activity has expanded at a solid pace and the labor market has been strong with a declining unemployment rate. The committee reported that household spending has been rising moderately and business fixed investment picked up.

Inflation declined in the latter part of 2017 and the rate is still below the committee’s longer‐run objective of 2 percent. However, longer‐term inflation expectations were little changed. The FOMC still expects economic conditions will warrant gradual increases in the federal funds rate in 2018.

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 8 U.S. Economy The federal funds rate, or the rate on short‐term loans between banks, and the prime rate offered by banks for short‐term business loans, are highly correlated. Since January 2016, the mean prime interest rate has averaged about 3.1 percentage points above the federal funds rate. Analysts anticipate three additional federal funds rate increases in 2018. As economic conditions remain strong, the outlook for the prime interest rate is 4.9 percent for 2018.

Unemployment: 4.4 percent in 2017(e); 4.3 percent in 2018(f). U.S. employment continued to grow in 2017, but at a slower rate of 1.5 percent compared with 1.7 percent in 2016. 2017 marks the seventh consecutive year of employment growth since contracting in 2010. The pace of job growth has declined as the unemployment rate continued to fall and the labor force participation rate remained near 40‐year lows. The labor force participation rate was up slightly from 2016, averaging 62.9 percent year‐to‐date through November 2017 compared with a monthly average of 62.8 percent in 2016. Meanwhile, the U.S.

unemployment rate averaged 4.4 percent in 2017, its lowest annual average since 2000. In 2017, the median number of weeks individuals over the age of 16 remained unemployed ranged from 10 to 10.6 weeks, which was down from 11.6 weeks recorded in July 2016. Unemployment duration peaked at 25.8 weeks in April 2010. The Manpower Employment Outlook Survey found hiring expectations in the U.S. remained strong for the first quarter of 2018 compared with the prior quarter, with U.S. employers reporting their strongest first quarter hiring intentions in 10 years. The percentage of employers planning to increase employment levels remained at 21 percent between the fourth quarter of 2017 and the first quarter of 2018.

The percentage of companies planning to reduce employment levels decreased to 5 percent compared with 6 percent a year ago and in the last quarter. The percentage of companies planning to maintain staffing levels (71 percent) was 2 percentage points lower than the prior year’s level. Survey analysts noted that employers in all 13 industry sectors expected to add staff in the first quarter of 2018. The top industries were leisure and hospitality and transportation and utilities. For transportation and utilities specifically, job prospects were the strongest reported since the survey started in the first quarter of 1982.

Additionally, a positive outlook was recorded in all four regions in the U.S., with the Midwest posting its strongest outlook since the beginning of 2001.

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 9 U.S. Economy Income Total Personal Income: +3.1 percent in 2017(e); +4.2 percent in 2018(f). Personal income has several components: earnings from work, asset‐based income, and government social insurance (transfer) payments. Personal income growth slowed in 2016 due to a number of factors including slower wage and salary growth, a drop in asset‐based income, and lower growth in transfer receipts. However, as the unemployment rate continued to fall in 2017, the tight labor market led to an increase in employee compensation.

Additionally, the push for higher minimum wages in many areas of the country may have supported higher wage levels. Twenty‐ nine states have a minimum wage higher than the federal minimum. In 2017, nineteen states began the year with higher minimum wages that were automatically increased based on cost of living, enacted from previous legislation, or raised through ballot initiatives. In many cases, increases will be phased in over several years and will far outpace inflation. Additionally, proprietors’ income increased at its fastest rate in three years and asset‐ based income rebounded. The tight labor market is anticipated to lead to wage gains in 2018.

Overall, total personal income increased 3.1 percent in 2017. Growth is expected to accelerate in 2018 to 4.2 percent.

Inflation Consumer Price Index: +2.1 percent in 2017; +2.0 percent in 2018(f). The Federal Reserve target inflation rate is 2 percent in the medium‐term, and the average in 2017 increased to 2.1 percent from 1.3 percent in 2016. Core inflation, which is total inflation less food and energy, increased at a 2.2 percent annual rate in 2016, but fell to a lower 1.8 percent rate in 2017. Overall inflation was boosted by more stable energy prices in 2017. In 2016, there was an 11 percent decline in the average crude oil price, following a 48 percent decline in 2015. However, the average price year‐to‐date in 2017 was about 19 percent higher than the same months in 2016.

The average monthly price bottomed out in February 2016 at about $30.00 per barrel based on data from the U.S. Energy Information Administration (EIA). Prices in 2017 have fluctuated between about $45 and $57 per barrel.

Looking ahead, the most recent EIA forecast of crude oil prices predicts an average of about $56 per barrel in 2018. While U.S. production is expected to increase at a much faster pace in 2018 than domestic consumption, a strengthening global economy and growth in exports will support prices. Further, OPEC is expected to extend production cuts through 2018. Based on year‐to‐date price appreciation for separate components of the consumer price index, housing and medical care are also contributing to stronger inflation in 2017. Over the past five years, prices in the housing index have increased at a 2.2 percent annual rate.

However, year‐to‐date data indicate that housing is on pace for 3 percent growth in 2017, the fastest rate since 2008. For medical care, prices have appreciated at an annual rate of 3 percent from 2011 to 2016, much faster than the 1.3 percent annual rate for all items. In 2017, the

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 10 U.S. Economy medical care index increased 2.6 percent year‐to‐date. Looking ahead, housing and medical care prices are expected to continue to outpace overall price appreciation. Continued monetary tightening by the Federal Reserve should moderate the pace of inflation in 2018. The Federal Reserve announced three rate increases for its target federal funds rate in 2017, raising the range to 1.25 to 1.5 as of December 2017. The Fed also began the process of shrinking the size of its balance sheet in October.

Monetary tightening typically dampens inflation as consumers have less money to spend and price increases of goods and services slow in response. Indeed, despite inflation accelerating at the beginning of 2017, the rate fell below the Fed’s target by the end of the year. While the growing economy will boost inflationary pressure, FOMC policy will stabilize inflation near its target.

National Business Cycle An important component of business cycle theory is the concept of potential GDP. Potential GDP is a measure employed by the CBO used to guide its economic projections. Potential GDP is defined as the maximum output that can be achieved in the economy over time without increasing the risk of inflation. Actual GDP fluctuates above and below potential GDP during business cycles. During a recession and early recovery, actual GDP falls below potential GDP. During the later phases of economic expansions, actual GDP typically rises above potential GDP. The difference between actual and potential GDP is measured by the CBO using the output gap which is expressed as actual GDP less potential GDP, as a percent of potential GDP.

Therefore, a negative output gap is associated with economic recessions and slack in the economy; a positive output gap is associated with overheating in the economy. According to the CBO, from 1961 to 2009, actual GDP was about 0.5 percent below potential GDP on average, or a slightly negative output gap.

Related to potential GDP is the concept of a natural rate of unemployment. The natural rate is defined as the unemployment rate exclusive of the influence of business cycles that is attributable to the economy’s ability to match jobs with employees. In other words, the unemployment rate associated with normal turnover, job creation and destruction, and the length of time required for job matching. During recessions, the actual unemployment rate will be well above the natural rate of unemployment and in the later stages of an expansion will be below it.

The CBO publishes measures of potential GDP and the natural rate of unemployment.

Based on the CBO estimates, the output gap has been negative since the Great Recession, dipping as low as ‐5.8 percent in 2009. The output gap has gradually approached zero, measuring at ‐0.7 percent in 2016. Based on the CBO’s most recent analysis, the output gap will rise into positive territory in 2018 and will persist into 2019, representing an economy that is operating past its potential. The CBO estimates the natural rate of unemployment since 2016 has been 4.7 percent. The estimated average unemployment rate in 2017 is 4.4 percent, 0.3 percentage points below the natural rate. The unemployment rate is expected to fall further below CBO’s natural rate in 2018.

As of January 2018, the U.S. economy has been expanding for 102 months, the third‐longest expansion in records dating back to 1854. For comparison, the longest expansion lasted 120 months from 1991 to 2001 and

U.S. ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 11 U.S. Economy the shortest expansion lasted 12 months from 1980 to 1981. Once the current expansion surpasses 106 months, as it likely will, it will be the second‐longest expansion to date. The Federal Reserve Bank of St. Louis produces a Smoothed U.S. Recession Probability model on a monthly basis that uses four variables to forecast the chance of an upcoming national recession. The variables are non‐farm payroll employment, the index of industrial production, real personal income, and real manufacturing and trade sales.

Healthy employment growth generally results in a low probability of recession. Indeed, the U.S. has currently posted 51 consecutive months of a recession probability under 3 percent. National Economy Summary The United States continued on its expansionary path, as all jobs lost during the recession were recovered by mid‐2014 and employment in 2017 grew by an estimated 1.5 percent. The employment growth rate is expected to increase at a slower pace, falling to 1.2 percent in 2018. Real gross domestic product will grow at a 2.4 percent pace in 2018, which is still below the historic average of 2.7 percent, spurred by rising consumer confidence, increased consumption, and rising business investment.

As GDP and employment expand, the nation’s unemployment rate will drop to 4.3 percent and total personal income will increase 4.2 percent in 2018. Inflation will continue to rise due to the stronger economy and more stable energy prices, lifting overall prices up by 2 percent.

COLORADO ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 12 Colorado Economy Colorado is expected to be among the top 10 states for employment growth during 2017, although final state employment data for the year will not be released until March. Colorado has ranked in the top 10 states for seven of the past 10 years, from 2007 to 2016. Preliminary numbers suggest 2.2 percent state employment growth in 2017, which is higher than the estimated national growth rate of 1.5 percent. The employment base will expand to 2.66 million workers in 2017, representing the addition of about 57,600 jobs.

Colorado’s growing labor market is supported by a diverse industry base and dynamic business climate. Colorado’s expanding employment base, high quality of life, and increasing presence in the global business community continue to attract individuals and businesses to the state. Colorado’s economy is expected to report positive trends through 2018 across most economic indicators.

The state has several unique advantages. The expanding entrepreneurial community, increasing start‐up activity, and highly educated workforce make Colorado an attractive location for business. In 2017, the state ranked:  ...third for its technology employment concentration (9.3 percent in 2016) on the CompTIA’s Cyberstates 2017 report.  ...fourth in the Economic Innovation Group’s Index of State Dynamism for the ability of its economy and population to adopt to changing conditions.

fifth most innovative state by WalletHub based on the state’s high educational achievement, share of technology companies, share of STEM professionals, and projected STEM‐job demand by 2020.

fifth most startup activity among the largest 25 states according to the 2017 Kauffman Index of Startup Activity for its rate of new entrepreneurs and startup density.  ...sixth on CNBC’s list of America’s top states for business with high rankings for its workforce, technology and innovation, and business friendliness.

seventh on the 2017 U.S. Clean Tech Leadership Index by Clean Edge, Inc., as one of only eight states to have a U.S. Department of Energy laboratory, a clean‐tech incubator, access to financial and human capital.  ...eighth best state for business by Forbes. Colorado was credited for its young, educated labor supply and a migrating population that is attracted to its robust economy and outdoor recreational opportunities.  ...ninth best state in U.S. News & World Report’s new best states rankings including No. 1 for its economy, No. 7 for infrastructure, and No. 11 in healthcare.

tenth in the nation in attracting private‐equity investment according to the American Investment Council, receiving $16.1 billion in capital investments supporting 18,265 jobs in 2016.

These favorable rankings suggest the state will continue to grow solidly and attract attention as a highly desirable place to live and work.

COLORADO ECONOMY Metro Denver Economic Development Corporation | January 2018 | Page 13 Colorado Economy Employment & Unemployment Note: Annual benchmark revisions to the employment and unemployment data series can significantly alter historic trends. As 2017 job data will be revised in March 2018, the exact revisions are not yet known. The following forecast is based on expected revisions to the data. Employment: +2.2 percent in 2017(e); +1.9 percent in 2018(f). Unemployment: 2.6 percent in 2017(e); 2.7 percent in 2018(f).

Colorado employment increased an estimated 2.2 percent in 2017, a similar pace as recorded in 2016.

Estimates show the state gained 57,600 jobs in 2017 compared with 2016, and is expected to gain another 50,500 jobs during 2018. Data from the U.S. Department of Labor’s Current Employment Statistics (CES) show that statewide employment surpassed its pre‐recession peak in June 2013. From 2011 through 2017, Colorado added 433,600 jobs to the state’s economy. Based on the unrevised, published employment numbers from the CES data, year‐to‐date through November, Colorado’s fastest growing supersectors in 2017 were the transportation, warehousing, and utilities supersector and the other services category; with transportation, warehousing, and utilities increasing 3.4 percent and other services increasing 3.3 percent.

The transportation, warehousing, and utilities supersector has been supported by various company announcements including large distribution centers in the Metro Denver area. Other services includes personal services, repair and maintenance services, and nonprofit organizations. The supersector mostly was boosted from a reclassification of companies from healthcare. Despite the fast pace of growth, these two supersectors accounted for only about 12.6 percent of the absolute growth in Colorado’s employment base. Colorado’s largest growth sectors in terms of absolute employment were professional and business services, leisure and hospitality, wholesale and retail trade, and education and health services.

Combined, these four supersectors comprised about 71 percent of Colorado’s absolute employment growth. None of Colorado’s supersectors lost employment in 2017. However, three of Colorado’s supersectors recorded employment growth well below the state average. The natural resources and construction supersector continued to struggle with slow growth in the mining subsector that includes oil and gas. While further job losses are not expected in oil and gas, the industry continues to recover from the steep job losses posted in 2016. Manufacturing continued to be impacted by three consecutive years of export contraction from 2014 to 2016.

However, employment was supported somewhat from an increase in exports through the first half of 2017, rising 7.1 percent compared with the first half of 2016. The information supersector recorded its fourth consecutive year of growth in 2017. However, the supersector has increased at an annualized rate of just 1 percent since 2013.

Looking ahead, the natural resources and construction; transportation, warehousing, and utilities; leisure and hospitality; and education and health services supersectors are expected to lead the state in employment growth through 2018. Professional and business services, education and health services, and leisure and